What’s the Ideal Credit Score for a Home Loan?
In Canada, the credit rating system ranges from 300-900 with 900 being the perfect credit score. A credit score is a result of a combination of three things: your payment history, your debt-to-income ratio, and credit utilization rate. The higher your credit score is, the better your chances of getting approved for a home loan.
If you’re planning on buying a house, you’ll want to make sure that your credit score is at least 680. But, most financial experts recommend having a credit score of at least 750 to further boost your chances of getting approved for a traditional home loan.
How to Improve Your Credit Score?
If you want to get the best possible deal on a home loan, you need to start improving your credit score as soon as possible. There are a few ways to do this, but the most effective way is to build a solid credit history. Here are some tips on how to do it:
Pay Your Bills on Time
Failing to settle your financial obligations on time will reflect poorly on your credit report and negatively impact your credit score. That’s why it’s important to make sure that all of your bills are paid on time every month.
Pay Down Your Debts
If you have a lot of debt, it’s important to pay off as much of it as possible. This is especially true for credit card debts. The credit bureaus use credit card debts as one of the major contributing factors when calculating your credit score. If you have a high balance on your credit cards, it will surely hurt your credit score.
Don’t Open New Credit Cards
If you already have one or two credit cards, you should never open another one. If you do, you’ll be putting yourself in a higher debt ratio and that could hurt your credit score. Plus, the temptation of having a high credit limit can be very hard to resist.
Basically, in order for you to achieve a decent credit score, you need to settle all your financial obligations as soon as possible.
Mortgage Interest Rates in Canada
Even if you can get approved for a bad credit home loan, the interest rates that you’ll have to pay will be very high. That’s why improving your credit score and applying for a traditional bank loan is still the best way to finance a home in Canada. Here’s a quick comparison of the average mortgage rates in Canada:
Traditional Banks (Good Credit)
Credit Score Requirement: 600 – 900
Interest Rate: Up to 3.5%
Top Canadian Banks: TD, BMO, CIBC, RBC
Private Lenders (Bad Credit)
Credit Score Requirement: 600 and below
Interest Rate: 5% to 15%
Private Lenders: Wealth Bridge Corporation, Clover Mortgage, True North Mortgage
Ways to Negotiate Lower Mortgage Rates
Do you know that you can negotiate with your lender to lower your mortgage rate? Here are some tips on how to do it:
Shop Around
Before you apply for a mortgage, you should shop around for a lender who offers the lowest rate. You can do this by contacting different lenders and asking them for their current mortgage rates. If you have a preferred lender, you can ask if they can match or beat the rate that you’ve found.
Pay a Bigger Down Payment
The bigger your down payment, the less you’ll have to pay in interest. In fact, the amount of your down payment is directly related to your interest rate. So, if you want to save money on your mortgage, you should pay a larger down payment.
Choose a Shorter Repayment Period
The longer you choose to repay your mortgage, the more interest you’ll have to pay. Therefore, the shorter the repayment period, the better. Banks view short-term mortgages as low-risk, so they will be willing to offer you a lower interest rate.
Lock Your Rate
If you have been shopping around for a while, you’ll have a clear idea of what the best mortgage rates are. If you already found a lender who offered you a good deal, you should lock it in. This way, you won’t have to worry about the rate changing in the future.
Conclusion
Your credit score is one of the biggest determining factors when it comes to getting a mortgage in Canada. If you’re looking to buy a house in the near future, you should start by improving your credit score for months or even years before applying for a home loan. This way, you’ll have time to pay off any debts and make sure that your credit report is clean.